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AFTS Secretariat
The Treasury
Langton Crescent
Parkes ACT 2600
Our ref
Pacific Brands - intangible assets
[email protected]
15 October 2008
By email
Tax treatment of intangible assets
Pacific Brands welcomes the opportunity to make a submission to the Australia’s Future Tax
System (‘AFTS’) review. The AFTS review provides an opportunity to address long-term
structural issues and to ensure that the tax system can support the Australian economy in
meeting future challenges.
Our submission focuses on the specific area of the tax treatment of intangible assets which
should be designed to assist the ownership and development of intellectual property as one of
the key drivers of productivity and global competitiveness.
Our submission calls for the amortisation of purchased goodwill and other intangible assets over
some predefined life of the asset, in a manner similar to that allowed for other forms of
intellectual property such as patents and registered designs.
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Summary
The broad policy reasons supporting our submission are:
1
The tax amortisation of goodwill will encourage the retention of intellectual property in
Australia which will have flow on benefits resulting in the retention of and attracting the
greatest minds to Australia.
2
Australia needs to be more competitive in this regard. Australia is one of only a handful of
the thirty OECD countries that does not allow for some form of tax amortisation for
goodwill.
3
Purchased goodwill and intangible assets are real economic outflows which should be
treated in the same way as other assets acquired to ensure those businesses rich in these
assets are not disadvantaged when compared to those which do not have such assets.
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Now is an appropriate time to revisit this issue as the landscape has changed since the 1999
Review of Business Taxation (‘the Ralph Report’).
Each of these are discussed below in section 2.
In addition, we touch on other aspects of the taxation and commercial settings that are consistent
with our submission. These are discussed in section 3.
Finally, we submit that if amortisation is not allowed for acquired goodwill and other
intellectual property, at a minimum, a deduction should be allowed when these items are
expensed in the accounts either as amortisation or impairment of the asset. This is discussed in
section 4.
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Broad policy reasons
2.1
Long term productivity and population goals
Intellectual property is vital to the long-term productivity of the economy. Our tax system
should aim to foster both the development and retention of intellectual property in Australia.
Goodwill and other intangible assets are linked to a specific business and therefore the most
common method of transferring goodwill/other intangible assets offshore (to a more favourable
tax regime) involves a transfer of some aspect of the connected business. Such businesses are
often “high value” businesses in terms of intellectual property and may involve significant
investment in the field of research and development.
The current tax regime confers a competitive advantage to the overseas owners of intellectual
property compared with the Australian owners of intellectual property. There is a real cash flow
disadvantage for Australian-resident owners of intellectual property, but a cash flow advantage
for non-residents.
The Tax Office 2008 Compliance Program identified intellectual property as one of the specific
areas of concern that it would be examining:
“The use of arrangements between related Australian and offshore entities to shift profits
(and tax) from Australia to other countries, including restructuring of Australian-based
operations to shift functions, assets and risks offshore, such as the sale of intellectual
property at a nominal price in return for a royalty stream 1 ”
Conversely, an Australian tax regime more favourable to the treatment of intangible assets
would provide more incentive for firms to relocate intellectual property to Australia together
with the attendant research and development activities.
1
Australian Taxation Office, Compliance Program 2008, p.52
Pacific Brands Submission 1
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A key concern in Australia is the attraction and retention of our greatest minds. If the tax
system is designed to encourage ownership of intellectual property in Australia, this will more
likely lead to the development of intellectual property in Australia rather than offshore.
Accordingly, our population is retained, if not increased and our greatest minds will not need to
relocate offshore to further develop our intellectual property.
There are currently about one million Australians living overseas. While Australians live
overseas for a wide variety of reasons, many in the knowledge-based industries are doing so
because the opportunities are more favourable to them in other countries. Part of the reason
why these opportunities are more favourable overseas is that other countries are more attractive
destinations for the development and ownership of intellectual property. If Australia had a
more favourable environment for intellectual property, it would also be more desirable for the
attraction and retention of a knowledge-based workforce.
In addition, the location of goodwill and intellectual property in Australia will provide a
platform for our future generations to benefit. Where the intellectual property is further
developed here it can be licensed to other jurisdictions and hence generate increased income
flows into Australia. Any alternate system, such as the current, which does not attract the
retention of intellectual property ownership within Australia encourages the converse and has
the potential for long term negative impact on Australia both from revenue and population
perspectives.
2.2
Australia compared
The existing Australian tax treatment of intangible assets is unfavourable to the ownership and
development of intellectual property in Australia. In some cases, Australian taxpayers might be
providing tax expenditures under the Research & Development tax concession or similar
schemes to support the development of intellectual property that subsequently relocates to
another more favourable jurisdiction for tax reasons.
The 2006 International Comparison of Australia’s Taxes 2 (the ‘Warburton-Hendy Report’)
noted that in comparing Australia’s corporate tax base:
“Australia’s treatment of depreciation, losses and goodwill is generally less favourable” 3
than other developed economies. A majority of the ten OECD countries compared with
Australia in the Warburton-Hendy Report allow the amortisation of goodwill, which Australia
does not permit. These countries (with broadly similar economies) included Canada, Japan, the
Netherlands, Spain, Switzerland, the United Kingdom and the United States. The exceptions
were Australia, New Zealand and Ireland. New Zealand does not have a capital gains tax
2
3
Warburton R & Hendy P, International Comparison of Australia’s Taxes, 2006
ibid, p.xvi
Pacific Brands Submission 1
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regime whilst Ireland is an attractive destination for business operations with its 12.5%
corporate tax rate.
Further, Australia is only one of a handful of OECD countries that does not provide for tax
allowance for goodwill. To be competitive, our system needs to be at least as favourable as that
of our trading partners. To the extent our regime for taxing intangible assets is more favourable,
Australia will become a more attractive destination for global business to hold and develop
intellectual property and, therefore, contribute to the population matters described above.
Additional information on the comparative treatment of goodwill is set out in Appendix A.
2.3
Purchased goodwill and other intellectual property acquired are real outflows
Purchased goodwill and intangible assets are real economic outflows when acquired from
another entity.
The current tax system penalises Australian entities which acquire these types of assets by not
providing tax relief when compared to entities which acquire other forms of more intensive and
tangible plant and equipment which are subject to tax relief.
In order to ensure that there is comparability between all industries and that those with high
levels of acquired goodwill/intellectual property are not disadvantaged, the tax system should
provide some form of equality and not differentiate between the two. This will have flow on
benefits by ensuring that tax does not impact the allocation of resources away from industries
highly dependent on intangible assets.
3
Other
3.1
Other forms of intellectual property
Australia’s depreciation regime allows for the amortisation of other forms of intellectual
property including software, patents, registered designs, copyrights, licences and
telecommunication site access rights.
There appears to be no fundamental policy reason as to why goodwill and other intellectual
property such as trade marks and brand names which are clearly distinct intellectual property
assets in their own right should not also be subject to the tax amortisation regime.
3.2
Goodwill is generally considered an active asset
As a general rule, the Australian tax regime treats goodwill as a “beneficial” or “nonmischievous” asset. For example, in Subdivision 768-G, goodwill is considered as an active
asset for the purposes of the active foreign business asset percentage test.
Pacific Brands Submission 1
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Under the proposed changes to the thin capitalisation rules, where goodwill is impaired for
accounting purposes, the gross value of goodwill is allowed to be taken into account in
determining a company’s gross assets.
Thus, again, there appears to be no essential rationale for excluding goodwill from the
depreciation / amortisation regime by virtue of the fact it is clearly an active business asset as
recognised in other parts of the tax law and not an asset that causes some form of mischief.
4
Accounting treatment inconsistency
Should our submission in relation to a “pure” amortisation regime not be accepted, as an
alternate measure we would argue strongly for a regime where tax deductions for intellectual
property such as goodwill, customer contracts, and client lists etc. are allowed where an expense
is recognised for accounting purposes.
This would be consistent with the current trend of simplification and the alignment of tax and
accounting in some areas of the tax law, for example, TOFA.
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Time for review
The Ralph Report recommended that the existing treatment of goodwill should be retained, but
also suggested that the issue should be re-visited:
“… the Review has decided that the existing treatment be retained. It does so with the
proviso that the scope for amortisation treatment be re-examined should the current
reforms prove to be more revenue positive than the estimates included in this report.
In coming to this conclusion, the Review recognises that this treatment disadvantages
Australian entities in competitive takeover situations where they are competing with
bidders based in jurisdictions that provide taxation depreciation for acquired goodwill.
This has become more significant with the change in accounting standards referred to
above.” 4
Since the Ralph Report, the Australian tax system has experienced highly revenue positive
levels of corporate tax receipts. In the 1999 Federal Budget corporate tax raised less than $24
billion and represented less than 15% of revenue and 3.7% of GDP. The 2008 Federal Budget
projects corporate tax receipts of more than $73 billion, representing over 24% of revenue and
6.4% of GDP. We contend that the revenue positive circumstances foreshadowed in the Ralph
Report clearly exist for the re-examination of the tax treatment of goodwill.
Almost a decade after the Review of Business Taxation it is now appropriate to reconsider the
tax treatment of intangible assets. We need to be competitive with tax policy developments
4
Review of Business Taxation, 1999, p.332
Pacific Brands Submission 1
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incomparable economies, alert to concerns expressed by the Tax Office and address key issues
of consistency with existing tax law and the accounting treatment.
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The AFTS Review provides policy-makers with the opportunity to revisit the tax policy settings
for intellectual property. In doing so it can create a tax regime that enhances productivity
through the development and retention of intellectual property in Australia and benefits the
Australian population through the attraction and repatriation of a knowledge-based workforce.
The AFTS Review provides us as a nation with opportunity to add significant value for the long
term benefit of Australia. We submit that providing tax amortisation for goodwill and other
intellectual property is an important measure in achieving these aims.
I advise that Pacific Brands’ taxation advisers are KPMG and PricewaterhouseCoopers.
Please do not hesitate to contact me on 03 8803 1446 should you wish to discuss these issues
further.
Yours sincerely,
David Thackray
David Thackray
Head of Tax
Pacific Brands Limited
ABN : 64106773059
Level 1, Building 10
658 Church St
Richmond, Victoria 3121
Pacific Brands Submission 1
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Appendix A – tax treatment of intangible assets compared
Australia
Intangibles are non-deductible and intangible assets should generally be depreciated on the basis
of their effective life as determined by the Tax Office or Treasury. The 2006 International
Comparison of Australia’s Taxes 5 (the ‘Warburton-Hendy Report’) noted that in comparing
Australia’s corporate tax base, “Australia’s treatment of depreciation, losses and goodwill is
generally less favourable” 6 than other developed economies. Over half of the ten OECD
countries compared with Australia allow the amortisation of goodwill, which Australia does not
permit.
International comparisons
Canada
Certain intangible assets such as patents, franchises, concessions and licences for a limited
period can be amortised over the life of the asset on a straight-line basis. Alternatively,
taxpayers may choose to amortise the cost of patents or rights to use patent information using
the diminishing value method at a rate of 25%.
Other intangible assets such as purchased goodwill, franchises, concessions and licenses for an
unlimited period can be amortised under the eligible capital expenditure system. In this case,
75% of the cost can be amortised at a maximum rate of 7% per year on a declining balance
basis.
United Kingdom
The United Kingdom introduced a new regime for the taxation of intangible assets with effect
from 1 April 2002. The reform followed a review of the taxation of such assets and was
introduced in recognition of the important role of intangible assets in today’s knowledge driven
economy. The reforms were also considered necessary for the UK to compete with jurisdictions
such as Germany, the Netherlands and the United States of America. 7
Under the new regime, the taxation of intangible assets for the corporate sector is aligned to the
accounting treatment. Broadly: 8
5
Warburton R & Hendy P, International Comparison of Australia’s Taxes, 2006
Ibid, p.xvi
7
See Reform Of The Taxation Of Intellectual Property Goodwill And Other Intangible Assets: A Technical Note By
The Inland Revenue available at http://www.hmrc.gov.uk/consult/ct_reform.htm; Reform of the Taxation of
Intellectual Property, Goodwill and Other Intangible Assets: The Next State available at
http://www.hmrc.gov.uk/consult_new/ct_reform2.pdf.
8
See, ‘Corporate Intangibles, Research & Development’ available at
http://www.hmrc.gov.uk/manuals/cirdmanual/cird00501.htm.
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Pacific Brands Submission 1
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•
In most cases the tax relief is based on the amortisation reflected in the company’s accounts.
There is also provision for tax allowances at a fixed rate of 4% per annum to provide for
relief in the case of indefinite or longer life assets.
•
The new rules apply to expenditure on the creation, acquisition and enhancement of
intangible assets (including abortive expenditure), as well as expenditure on their
preservation and maintenance. Relief under the new regime is therefore available for the
cost of internal development, as well as acquisition, of intangible assets.
•
Payments for the use of intangibles are also within the scope of the new regime. The charge
on income rules no longer applies to royalty payments and relief is given in line with the
accounting treatment. The taxation of royalty receipts also follows the accounts.
•
Disposals of intangible assets are taxed on an income basis under the new regime. A rollover relief applies where disposal proceeds are reinvested in new intangible assets within
the regime.
•
Intangible assets that companies hold at commencement will generally be taxed under
current law, subject to the changes in roll-over relief described below.
•
Capital gains on the disposal of intangible assets held at commencement will qualify, where
appropriate, for roll-over relief under the new arrangements for intangible assets.
United States
The taxation of intangible assets is dealt with by section 197 of the Internal Revenue Code.
Under that section, the following assets must be amortised over a period of 180 months (fifteen
years):
(a) Goodwill.
(b) Going concern value.
(c) Workforce in place.
(d) Business books and records, operating systems, or any other information base, including
lists or other information concerning current or prospective customers.
(e) A patent, copyright, formula, process, design, pattern, know-how, format, or similar item.
(f) A customer-based intangible.
(g) A supplier-based intangible.
(h) Any item similar to the items (c) through (g).
Pacific Brands Submission 1
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(i) A license, permit, or other right granted by a governmental unit or agency (including
issuances and renewals).
(j) A covenant not to compete entered into in connection with the acquisition of an interest in a
trade or business.
(k) Any franchise, trademark, or trade name.
(l) A contract for the use of, or a term interest in, any item in this list.
However, for items (a) to (h), amortisation is not available for assets that are created rather than
acquired unless they are created in acquiring assets that make up a trade or business or a
substantial part of a trade or business.
Pacific Brands Submission 1
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AFTS Secretariat
The Treasury
Langton Crescent
Parkes ACT 2600
[email protected]
16 October 2008
By email
Individual taxation issues
Pacific Brands welcomes the opportunity to make a submission to the Australia’s Future Tax
System (‘AFTS’) review in respect of the taxation of individuals. The AFTS review provides an
opportunity to address long-term structural issues and to ensure that the tax system can support
the Australian economy in meeting future challenges.
Our submission focuses on the areas of individual taxation which we believe have a significant
impact on employee welfare and participation levels within the Australian workforce. Pacific
Brands employs over six thousand Australians. We consider some of the key issues affecting
them are childcare affordability, the cost of higher education and the heavy taxation on single
income families.
Summary
In summary, our submissions are:
1
Childcare – enhancing female workforce participation through salary sacrifice arrangements
and exempting childcare costs from FBT.
2
Education – removing Higher Education Loan Program (HELP) fees to encourage greater
student participation, develop our brightest minds and ultimately build a more competitive
economy.
3
Income splitting – providing the option to income split. This addresses the inequity where a
single income family may pay a greater proportion of tax when compared to a double
income family.
Each of these proposals is discussed below.
2
1
Childcare
The provision of childcare is a key barrier to increasing participation by women in the
workforce and with many family relationships in which the responsibility for children is shared
between parents; it can also constrain the productivity of the other partner. The OECD noted in
introducing its recent ‘Babies and Bosses’ 1 research:
If parents cannot achieve their desired work/family life balance, not only is their welfare
lower but economic development is also curtailed through reduced labour supply by
parents. A reduction of birth rates has obvious implications for future labour supply as
well as for the financial sustainability of social protection systems. As parenting is also
crucial to child development, and thus the shape of future societies, policy makers have
many reasons to want to help parents find a better work/family balance. 2
Childcare has immediate consequences for female participation in the workforce and arguably
for population issues over the longer term. Pacific Brands is acutely aware of the issues
associated with female participation in the workforce and the issues of childcare. Almost twothirds of our employees at Pacific Brands are women and about one third of them, or more than
20 per cent, are of child bearing age. By comparison, the most recent Australian Bureau of
Statistics data 3 reveals that the national average for female employment is much lower at about
45 per cent of the workforce. We typically have up to sixty women on maternity leave at any
given time and our experience has been that about 40 per cent of women who take maternity
leave are unable to return to their jobs because of a lack of access to suitable and affordable
childcare.
While acknowledging that much is being done to assist the provision of childcare in the form of
tax rebates, we feel that this could be enhanced. Specifically, we propose that an alternative to
the current childcare tax rebates regime would be to enable employees to salary sacrifice
childcare fees levied by approved childcare facilities that were not located at the workplace.
Work, commuting and travel patterns vary considerably among our employees and a clear
preference would be to have considerable flexibility in the location of childcare facilities.
Salary sacrifice arrangements would also offer a more immediate benefit than the quarterly
childcare tax rebates. Based on experience with our own workforce, we believe that a flexible
ability to salary sacrifice childcare charges would have a significant long-term impact on
increasing participation in the workforce after the birth of a child. We therefore suggest that
employees should have the option of accessing either the current childcare tax rebate or utilising
a salary sacrifice arrangement.
The current Fringe Benefits Tax (FBT) exemption for childcare applies to organisations that
provide the childcare on their own premises. While some major employers have been able to
provide childcare on their premises and have reportedly increased their post-maternity leave
return to work rates to above 80 per cent, the FBT exemption effectively discriminates against
1
Organisation for Economic Cooperation and Development, Babies and Bosses; reconciling work and family life,
2007
2
http://www.oecd.org/document/45/0,3343,en_2649_34819_39651501_1_1_1_1,00.html
3
Australian Bureau of Statistics, Labour Force 6202.0, September 2008
Pacific Brands Submission 2
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small to medium enterprises and ignores the fact that many businesses have no desire to own,
operate and bear the risk of running childcare centres. Further, the FBT exemption implies that
the childcare should be provided at the workplace, irrespective of the fact that employees may
desire different arrangements, such as childcare provided closer to home. We therefore propose
that in addition to the salary sacrifice option proposed above, that the existing FBT exemption
for childcare should be widened in order to make it available for all childcare costs.
Much of the emphasis on childcare issues is focussed on women as the primary caregivers and
increasing female participation in the workforce, there are also many families in which these
responsibilities are shared more widely between parents. In the case of such families the
provision of childcare should also lead to an increase in the workforce participation rate by men.
2
Education
Education is an important driver of future productivity in the Australian economy and deepens
our understanding of community issues. Higher education benefits individuals, companies,
communities and the nation. We need to develop our people by upgrading their skills and
knowledge by providing higher education for people from all backgrounds.
To further support higher education, Pacific Brands propose the abolition of HELP (formerly
HECS) fees for the first degree/course so that higher education is free for all Australian citizens
who meet the entry requirements.
We feel that removing the economic burden from higher education will encourage greater
student participation, develop our brightest minds and ultimately build a more competitive
economy. In addition, the initial cost of free higher education is more than compensated by the
higher wages and increased taxes that the individual pays over their employment life.
3
Income splitting
At present, a single income couple earning the same amount as a two-income couple would get
just one tax-free threshold and could pay a higher tax rate on the remaining income. This
inequity could be remedied by a system that allows for income splitting.
Joint or family taxation arrangements exist in some form in about a third of OECD economies
including the major economies of France, Ireland, Switzerland and the United States.
We suggest that the Review should consider a possible option for families to income split. This
would involve changing the way a family is taxed. For example, a single income family would
be taxed such that the single income would be split between the taxpayer and his/her spouse
equally. In most instances each individual would benefit from the current tax-free thresholds
and reduced levels of taxation.
The tax splitting (averaging) of dual income families would also result in more equitable
taxation by recognising the shared allocation of responsibilities within the family or income
earning unit.
Pacific Brands Submission 2
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By providing families with the option to be taxed in this way, each family would be able to
assess what is in its best interests and hence the tax and transfer system would work in manner
that suits all recipients.
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The AFTS Review provides an opportunity to address issues relevant to individual Australians
in the tax and transfer system that can lead to increased participation, increase productivity and
have benefits for the population over the longer term. We suggest that using the tax system to
enhance the provision of childcare, encouraging higher education and giving Australians an
option to income split will help to achieve these goals.
I advise that Pacific Brands’ taxation advisers are KPMG and PricewaterhouseCoopers.
Please do not hesitate to contact me on 03 8803 1446 should you wish to discuss these issues
further.
Yours sincerely,
David Thackray
David Thackray
Head of Tax
Pacific Brands Limited
ABN: 64106773059
Level 1, Building 10
658 Church St
Richmond, Victoria 3121
Pacific Brands Submission 2
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